Financial Reform: Will We Even Have a Debate?

Financial Reform: Will We Even Have a Debate?

by

Simon Johnson

The
New York Times reports that financial reform is the next top
priority for Democrats. Barney Frank, fresh from meeting with the
president, sends a promising signal,

"There are going to be death panels enacted by the
Congress this year - but they're death panels for large financial
institutions that can't make it," he said. "We're going to put them to
death and we're not going to do very much for their heirs. We will do
the minimum that's needed to keep this from spiraling into a broader
problem."

But there is another, much less positive interpretation regarding
what is now developing in the Senate. The indications are that some
version of the Dodd bill will be presented to Democrats and Republicans
alike as a fait accompli - this is what we are going to do, so are you
with us or against us in the final recorded vote? And, whatever you do -
they say to the Democrats - don't rock the boat with any strengthening
amendments.

Chris Dodd, master of the parliamentary maneuver, and the White House
seem to have in mind curtailing debate and moving directly to
decision. Republicans, such as Judd
Gregg and Bob Corker,
may be getting on board with exactly this.

Prominent Democratic Senators have indicated they would like
something different. But it's not clear whether and how Senators
Cantwell, Merkley, Levin, Brown, Feingold, Kaufman, and perhaps others
will stop the Dodd juggernaut (or is it a handcart?)

This matters, because there is more than a small problem with the
Dodd-White House strategy: the bill makes no sense.

Of course, officials are lining up to solemnly confirm that "too big
to fail" will be history once the Dodd bill passes.

But this is simply incorrect. Focus on this: How can any approach
based on a US resolution authority end the issues around large complex
cross-border financial institutions? It cannot.

The resolution authority, you recall, is the ability of the
government to apply a form of FDIC-type intervention (or modified
bankruptcy procedure) to all financial institutions, rather than just
banks with federally-insured deposits as is the case today. The notion
is fine for purely US entities, but there is no cross-border agreement
on resolution process and procedure - and no prospect of the same in
sight.

This is not a left-wing view or a right-wing view, although there are
people from both ends of the political spectrum who agree on this point
(look at the endorsements for
13 Bankers). This is simply the technocratic assessment - ask your
favorite lawyer, financial markets expert, finance professor,
economist, or anyone else who has worked on these issues and does not
have skin in this particular legislative game.

Why exactly do you think big banks, such as JP Morgan Chase and
Goldman Sachs, have been so outspoken in support of a "resolution
authority"? They know it would allow them to continue not just at their
current size - but actually to get bigger. Nothing could be better for
them than this kind of regulatory smokescreen. This is exactly the
kind of game that they have played well over the past 20 years - in
fact, it's from the same playbook that brought them great power and us
great danger in the run-up to 2008.

When a major bank fails, in the years after the Dodd bill passes, we
will face the exact same potential chaos as after the collapse of
Lehman. And we know what our policy elite will do in such a situation -
because Messrs. Paulson, Geithner, Bernanke, and Summers swear up and
down there was no alternative, and people like them will always be in
power. If you must choose between collapse and rescue, US policymakers
will choose rescue every time - and probably they feel compelled again
to concede most generous terms "to limit the ultimate cost to the
taxpayer" (or
words to that effect).

The banks know all this and will act accordingly. You do the math.

Once you understand that the resolution authority is an illusion, you
begin to understand that the Dodd legislation would achieve nothing on
the systemic risk and too big to fail front.

On reflection, perhaps this is exactly why the sponsors of this bill
are afraid to have any kind of open and serious debate. The emperor
simply has no clothes.

Further

With the toxic Bibi circus in town - cue talk of "tentacles of terror" - find hope in the extraordinary Combatants For Peace, a joint effort by Israeli and Palestinian veterans of violence who've laid down their guns to fight for peace. Led by a former IDF soldier and Fatah militant who both lost daughters to the conflict's "unrightable wrongs," they insist on the need to "hear what is painful" and "talk to your 'enemies'... For the sake of our children, we go on. Partners for peace always...